Correlation Between Fifth Third and China Merchants

Can any of the company-specific risk be diversified away by investing in both Fifth Third and China Merchants at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Fifth Third and China Merchants into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Fifth Third Bancorp and China Merchants Bank, you can compare the effects of market volatilities on Fifth Third and China Merchants and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Fifth Third with a short position of China Merchants. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fifth Third and China Merchants.

Diversification Opportunities for Fifth Third and China Merchants

-0.16

Correlation Coefficient

Fifth Third  China Merchants

Good diversification

The 3 months correlation between Fifth and China is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding Fifth Third Bancorp and China Merchants Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Bank and Fifth Third is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Fifth Third Bancorp are associated (or correlated) with China Merchants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Merchants Bank has no effect on the direction of Fifth Third i.e., Fifth Third and China Merchants go up and down completely randomly.

Pair Corralation between Fifth Third and China Merchants

Assuming the 90 days horizon Fifth Third is expected to generate 1.67 times less return on investment than China Merchants. But when comparing it to its historical volatility, Fifth Third Bancorp is 3.22 times less risky than China Merchants. It trades about 0.02 of its potential returns per unit of risk. China Merchants Bank is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  476.00  in China Merchants Bank on January 26, 2024 and sell it today you would lose (75.00) from holding China Merchants Bank or give up 15.76% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	93.72%
Values	Daily Returns

Fifth Third Bancorp  vs.  China Merchants Bank

Fifth Third Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Fifth Third Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable fundamental drivers, Fifth Third is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

China Merchants Bank

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical indicators, China Merchants reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Fifth Third and China Merchants

The main advantage of trading using opposite Fifth Third and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fifth Third position performs unexpectedly, China Merchants can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in China Merchants will offset losses from the drop in China Merchants' long position.

The idea behind Fifth Third Bancorp and China Merchants Bank pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.